Inflation targeting as a future framework for Tunisian monetary policy: Between perception and reality in an inflationary context

Abstract

This paper aims at examining the relationship between macroeconomic variables, the consumer price index, economic growth measured as Gross domestic product (GDP), the nominal effective exchange rate NEER, the money market rate TMM and the money supply M2 in the case of Tunisian economy. After a brief overview of the theoretical discussions on the link between the consumer price index and the macroeconomic variable as an essential condition for an inflation targeting policy, we first present some observations for Tunisia. The limit testing approach of cointegration and error correction models, developed in an autoregressive distributed delay (ARDL) framework combined with the CUSUM and CUSUMQ tests, is presented to the annual data for the period 1990 to 2018 in order to examine whether there is a long-term equilibrium relationship between the consumer price index and the key macroeconomic variables. The result of the limit test indicates that there is a stable long-term relationship between the consumer price index (CPI), economic growth, money supply, and money market rate. The estimated results show that the variables in the model are positively linked in the long and short term. This empirical evaluation shows the existence of predictable which is one of the main conditions for the adoption of an inflation targeting policy.